Executive pay hurts economy

[Uncle Leo]

http://www.billingsgazette.com/index.php?i...30-pfinance.inc

 

Personal finance: Obscene executive pay affects earnings, economy

Jeff Brown

PERSONAL FINANCE

 

How much has your income gone up in the past few years? Probably by 2 percent or 3 percent a year, if you're lucky.

 

Unless you're a top executive.

 

Data isn't in yet for 2005, but in 2004 chief executives' incomes grew 30 percent, after gains of 15 percent in 2003 and 9.5 percent in 2002, according to a recent study by The Corporate Library, a Portland, Maine, outfit for better corporate governance.

 

You don't have to be a business expert to know this is outrageous, and the Securities and Exchange Commission plans to tackle the problem by considering a plan to require better disclosure of executive compensation.

 

As the first big initiative of SEC Chairman Christopher Cox, a Republican who took over in August, it goes in the right direction - but falls short.

 

Business groups and other defenders of the status quo have long argued executive pay should be a nonissue because even a multimillion-dollar payout is a drop in the corporate-revenue bucket and has little effect on profits.

 

But another recent study shows that's not the case. Professors Lucian Bebchuk of Harvard and Yaniv Grinstein of Cornell found that from 1993 to 2003, the total cost of executive pay grew from 5 percent of annual corporate earnings to 10 percent.

 

In other words, if pay had stayed at the 1993 level, earnings might have been 5 percent higher in 2003. All else being equal, that could have pushed stock prices up by 5 percent.

 

But the cost of excessive executive pay may be even greater, as this study didn't cover the big pay increases of 2004 or the many types of compensation that are hidden. Also, it was confined to each company's top five executives. How many others received outsized raises?

 

Since there's no practical way to legislate caps on executive pay, Cox hopes to harness market forces with better disclosure. The annual shareholders' proxy statement would have to report the value of each executive's entire compensation package in one place, assign a value to stock options and list perks if their total value is more than $10,000 instead of $50,000, as is currently required.

 

Companies also would have to reveal more about executives' retirement plans and the golden parachutes they'd receive if their companies were sold or taken over.

 

But these disclosures would cover only a company's top five executives and the board of directors. Disclosure should go much further.

 

For a start, it should apply to the top executives at every unit incorporated separately from the parent company. At big companies, that would expand the list to dozens of people, and in some cases to hundreds.

 

Unfortunately, there's not much investors can do about companies that pay too much, other than avoid those stocks. It's incestuous: Pay is set by the directors, and they often feel beholden to the chief executives who invite them onto the board.

 

Another study by The Corporate Library found that total compensation for corporate directors grew by about 20 percent between 2004 and 2005, with the median director receiving about $151,000 at large companies, $104,000 at midsized ones and $82,000 at smaller ones.

 

Many directors boost the take by serving several boards. You can imagine one's reluctance to rock the boat by urging restraint in executive pay.

 

The solution is to get better directors. Today, shareholders are typically offered only candidates nominated by the board itself, and there's usually only one per board opening.

 

Cox's predecessor at the SEC, William Donaldson, wanted to let unhappy shareholders nominate their own candidates, but the idea died in the face of strong opposition from business groups. Cox should revive it, but he has shown no interest in doing so.

 

Skyrocketing executive pay is more than just a pocketbook issue for shareholders. It affects our regard for the market economy and our sense of whether America operates on principles of fair play and just reward.

 

This should be a country where one gets rich through hard work and talent - not by gaming the system.

 

Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at brownj@phillynews.com.